Monthly Archives: January 2013

Adam Posen’s attack on the management and culture of the Bank of England may be the strongest yet, but it is by no means the first – and won’t be the last – criticism of a persistent and dismaying lack of robust governance at the UK central bank.

If a close confidant had asked Sir Mervyn King, governor of the Bank of England, a year ago which City institutions he would like to take down a peg or two, the answer might well have been: Goldman Sachs and Barclays.

It has happened more by accident and opportunism than by express design, but during the past six months, the governor has duly hit those banks where it hurts. Read more

Developing countries should not be tempted to stimulate their economies this year in the face of weak growth, the World Bank warned on Wednesday even though the world faces another challenging year.

In forecasts that suggest 2013 will see only marginally stronger growth than last year, the Bank recommends that poor and middle-income countries concentrate on fundamental drivers of prosperity rather than attempt a quick fix.

The eyebrows of the governor of the Bank of England could become a force to be reckoned with once more.

In the days before the Basel rules, an eyebrow raised by the top man at the Bank — which was then chief financial regulator — supposedly put a stop to any misbehaviour by the banks.

It took slightly more than a raised eyebrow today. But just hours after Sir Mervyn King described Goldman Sachs’ plan to defer bonuses to avoid the 50 per cent top rate of income tax as “disappointing”, the US investment bank backed down.Read more

The Bank of England has reaffirmed its plans to tackle housing bubbles by raising lenders’ capital requirements, rather than banning borrowers from taking out certain types of mortgages.

The BoE’s interim Financial Policy Committee, the body set up to safeguard the stability of the financial system, on Monday said it would aim to reduce “exuberance” in the housing market by raising so-called “sectoral capital requirements” that make lenders hold more capital against certain types of loans.

The first thing to note is that contrary to well-intentioned explainers such as this one from the BBC, or the otherwise-rather-good editorial in today’s Times newspaper, the problem in the calculation of the RPI is not to do with the difference between geometric averages and arithmetic averages. It is really about the deficiencies of one particular arithmetic average, the Carli index.

Don’t just believe me, play with this spreadsheet, (Price indices). I will also help you to use it with a few worked examples. The worked examples are extremes, but they serve to show the important biases of different ways of calculating inflation. Read more

Four years ago, Zoltan Pozsar helped change how policy makers visualise the financial world when he worked with colleagues at the New York Federal Reserve to create a gigantic wall map of shadow banking. Astonishingly, it was the first time anyone had laid out these financial flows in detailed, graphic form. And by doing that, the NY Fed researchers showed why the sector mattered – and why policy makers needed to rethink how the financial ecosystem did (or did not) work.

Now Pozsar has left the NY Fed and teamed up with Paul McCulley, the former investment luminary of Pimco (and the man who coined that phrase “shadow banking”) to tackle another issue. But this time, it is not securitisation they want to “map” – but “helicopter money”, or quantitative easing.

Mario Draghi, president of the European Central Bank. Image by DANIEL ROLAND/AFP/Getty Images.

Hello and welcome to today’s live blog for European Central Bank president Mario Draghi’s first press conference of 2013.

Mr Draghi will begin speaking at 13.30. All times are UK time.

14.40 The live blog is now closed.

14.38 The ECB president struck a very upbeat tone at today’s presser.

Mr Draghi is clearly delighted with the recent developments in financial markets (see 13.46), though he warned against complacency on the part of governments and added that we were yet to see any signs of an economic recovery.

Because markets were a lot more positive, the governing council was unanimous in deciding to hold rates and no-one even bothered to discuss the option of a cut, which now looks unlikely to happen in the coming months.

14.30 The questions end. Recap to follow.

14.28 Contagion is now working in the eurozone’s favour. “There is a positive contagion when things go well and that’s what’s in play now,” he says.

Despite the recent progress made, however, Draghi say DON’T relax. Which is all well and good, but it doesn’t make for a decent t-shirt does it?

He urges governments to keep up the good work and continue to implement structural reforms.

The macroeconomic debate is now buzzing about “political dominance” over the central banks, under which elected politicians force central bankers to take actions they would not choose to take, if left to their own devices [1]. This is clearly what is happening in Japan, where the incoming Shinzo Abe government is not only imposing a new inflation target on the Bank of Japan (which is legitimate), but is changing the leadership of the central bank to ensure that the BoJ adopts policies compliant with the fiscal regime. This is not just political dominance, it is fiscal dominance, where monetary policy is subordinated to the decisions of those who set budgetary policy.

There have also been some early signs of political or fiscal dominance emerging elsewhere, notably in the use of the ECB balance sheet to finance cross-border financial support operations in the eurozone, and the “coupon raid” conducted by the UK Treasury on the Bank of England. Many investors have concluded that there is now an inevitable trend in place that will overthrow central bank independence throughout the developed world, allowing politicians to expand fiscal policy, while simultaneously inflating away the burden of public debt.

Last week, the International Monetary Fund published a working paper by Olivier Blanchard and Daniel Leigh revisiting the estimates of the effect of austerity that caused such a stir in the October World Economic Outlook. Many people took the box in the WEO as proof of the absurdity in attempts at deficit reduction.

At the time, I published an article and a technical blog in the FT, casting some doubt on the robustness of the IMF’s work. It also caused a minor stir. I included all the data so people could play around with the numbers themselves if they wished.

In December, another part of the IMF published a working paper using different methodology, which found much smaller multipliers. It is not the first time that different parts of the fund disagree. It will not be the last.

What does the new working paper say and what conclusions should we draw?

Last October, the UK passed the 20th anniversary of inflation targeting. There have been a couple of slight adjustments to the target – in 1997 and 2004, but since 1992 the UK has benefited from a remarkable degree of consistency in its monetary policy framework.

We have to go back to before the first world war – under the Gold Standard – to find such a long period of stability in UK monetary policy. Since then, the only other period that comes close was 1949-67, when the value of the pound was pegged at $2.80 against the dollar.

Those in favour of sticking with the status quo — 45 per cent — outnumber those calling for a shift to a new regime — 35 per cent. (And not all of those in favour of a switch back Mr Carney’s calls for central banks to target nominal GDP instead.) But in previous years, support from more than a handful of economists for the scrapping of the inflation target would have been unthinkable.

Interestingly, support for change is stronger than average among those who have had to work with inflation targeting: of the ten former MPC members that took part in the poll, five want to do away with the current regime, with the rest in favour of keeping it. Read more

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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS

Claire Jones is the FT's Eurozone economy correspondent, based in Frankfurt. Prior to this, she was an economics reporter in London. Before joining the Financial Times, she was the editor of the Central Banking journal. Claire studied philosophy and economics at the London School of Economics. RSS

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS

Sarah O’Connor is the FT’s economics correspondent in London. Before that, she was a Lex writer, covered the US economy from Washington and the Icelandic banking collapse from Reykjavik. Sarah studied Social and Political Sciences at Cambridge University and joined the FT in 2007. RSS

Ferdinando Giugliano is the FT's global economy news editor, based in London. Ferdinando holds a doctorate in economics from Oxford University, where he was also a lecturer, and has worked as a consultant for the Bank of Italy, the Economist Intelligence Unit and Oxera. He joined the FT in 2011 as a leader writer. RSS

Emily Cadman is an economics reporter at the FT, based in London. Prior to this, she worked as a data journalist and was head of interactive news at the Financial Times. She joined the FT in 2010, after working as a web editor at a variety of news organisations.
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Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS

Ben McLannahan covers markets and economics for the FT from Tokyo, and before that he wrote Lex notes from London and Hong Kong. He studied English at Cambridge University and joined the FT in 2007, after stints at the Economist Group and Institutional Investor. RSS